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Friday, January 11, 2013

The National Taxpayer Advocate Speaks Up

Yes,.there is a National Taxpayer's Advocate, and her name is Nina E. Olson. She has just released the National Taxpayer Advocate 2012 Annual Report to Congress. The report covers a lot of ground, each year looking at issues like taxpayer rights, taxpayer rights, identity theft, and other topics. Here, I'll just focus on one topic: "The most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code." Here are some samples of the comments (footnotes omitted):

"According to a TAS analysis of IRS data, individuals and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Internal Revenue Code. And that figure does not include the millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits. If tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the “tax industry” requires the equivalent of more than three million full-time workers. ... Based on Bureau of Labor Statistics data on the hourly cost of an employee, TAS estimates that the costs of complying with the individual and income tax requirements for 2010 amounted to $168 billion — or a staggering 15 percent of aggregate income tax receipts."

"According to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day."

"The tax code has grown so long that it has become challenging even to figure out how long it is. A search of the Code conducted using the “word count” feature in Microsoft Word turned up nearly four million words."

"Individual taxpayers find return preparation so overwhelming that about 59 percent now pay preparers to do it for them. Among unincorporated business taxpayers, the figure rises to about 71 percent. An additional 30 percent of individual taxpayers use tax software to help them prepare their returns, with leading software packages costing $50 or more."

"IRS data show that when taxpayers have a choice about reporting their income, tax compliance rates are remarkably low. ... [A]mong workers whose income is not subject to tax withholding, compliance rates plummet. An IRS study found that nonfarm sole proprietors report only 43 percent of their business income and unincorporated farming businesses report only 28 percent. Noncompliance cheats honest taxpayers, who indirectly pay more to make up the difference. According to the IRS’s most recent comprehensive estimate, the net tax gap stood at $385 billion in 2006, when there were 116 million households in the United States. This means that each household was effectively paying a “surtax” of some $3,300 to subsidize noncompliance by others."

"From FY 2004 to FY 2012, the number of calls the IRS received from taxpayers on its Accounts Management phone lines increased from 71 million to 108 million, yet the number of calls answered by telephone assistors declined from 36 million to 31 million. The IRS has increased its ability to handle taxpayer calls using automation, but even so, the percentage of calls from taxpayers seeking to speak with a telephone assistor that the IRS answered dropped from 87 percent to 68 percent over theperiod. And among the callers who got through, the average time they spent waiting on hold increased from just over 2½ minutes in FY 2004 to nearly 17 minutes in FY 2012."

"The IRS receives more than ten million letters from taxpayers each year responding to IRS adjustment notices. Comparing the final week of FY 2004 with the final week of FY 20102, the backlog of taxpayer correspondence in the tax adjustments inventory increased by 188 percent (from 357,151 to 1,028,539 pieces), and the percentage of taxpayer correspondence classified as “overage” jumped by 316 percent (from 11.5 percent to 47.8 percent)."

"In 2012, TAS [the Taxpayer Advocate Service] conducted a
statistically representative national survey of over 3,300 taxpayers who
operate businesses as sole proprietors. Only 16 percent said they
believe the tax laws are fair. Only 12 percent said they believe
taxpayers pay their fair share of taxes."

"To alleviate taxpayer burden and enhance public confidence in the integrity of the tax system, the National Taxpayer Advocate urges Congress to vastly simplify the tax code. In general, this means paring back the number of income exclusions, exemptions, deductions, and credits (generally known as “tax expenditures”). For fiscal year (FY) 2013, the Joint Committee on Taxation has projected that tax expenditures will come to about $1.09 trillion, while individual income tax revenue is projected to be about $1.36 trillion. This suggests
that if Congress were to eliminate all tax expenditures, it could cut
individual income tax rates by about 44 percent and still generate about
the same amount of revenue."

Finally, I'm not the biggest fan of infographics,which often seem to me like overcrowded Powerpoint slides on steroids. But for those who like them, here's one from the National Taxpayer Advocate summarizing many of these points: